On September 10, the Bank of Korea identified leveraged ETFs and borrowing-based investments as factors behind increased volatility in the domestic stock market.
The analysis suggests that increased trading when stock prices rise can intensify selling pressure during a downturn.
A point to watch in this report is the combination of semiconductor concentration and leverage.
3-Line Summary
1. The Bank of Korea viewed leveraged ETFs as a factor behind volatility
2. Two semiconductor stocks had a significant impact on the index
3. The causes of gains and the risks of declines should be considered together
Semiconductor Concentration Amplified Index Movements
In its Monetary Policy Report on September 10, the Bank of Korea assessed that domestic stock price volatility had been relatively high compared with that of major countries. One of the causes cited in the report was a structure in which stock price gains were concentrated in some semiconductor companies.
According to a Yonhap News TV report, the Bank of Korea estimated that the combined contribution of Samsung Electronics and SK hynix to the rise was 99.0% when the KOSPI rose from 8,000 to 9,000. Samsung Electronics accounted for 44.7%, and SK hynix for 54.3%. This means that as the market becomes more sensitive to the outlook for the same industry, movements in the two companies can spread into movements in the index as a whole.
The report explained that changes in the outlook for the memory semiconductor industry since June and sharp declines in the stock prices of related companies led to a major correction in the KOSPI. It also presented an estimate that the two companies’ contribution to the decline was 69.3% when the KOSPI fell from 9,100 to 5,500. These figures show the impact that the weight and stock price sensitivity of specific stocks can have on market volatility.
Leverage Amplifies Both Upside and Downside Moves
A leveraged ETF is an exchange-traded fund designed to target returns greater than the movement of its underlying assets. The Bank of Korea assessed that the surge in investment in these products, based on expectations of a sustained rise in stock prices, increased volatility from a supply-and-demand perspective.
Stock investment by individuals based on borrowing also rose to an all-time high before being liquidated, and was identified as a factor that widened the range of stock price gains and declines. The report’s concern is that when stock prices rise, inflows of funds can amplify price movements, while when positions are unwound, selling pressure can overlap.
Leverage in domestic stocks held by overseas investors was also mentioned as a separate variable. The Bank of Korea explained that unexpected spillover effects emerged as domestic spot and futures trading for hedging purposes increased. This is one reason it is difficult to interpret market movements based solely on trading by domestic investors.
The Bank of Korea’s Proposal Is to “Strengthen Monitoring”
The Bank of Korea proposed that leveraged ETFs and stock investments through borrowing should be examined more closely in the short term. Over the medium to long term, it believed that concentration in specific industries and companies should be reduced and the investor base broadened to strengthen the market’s resilience.
This assessment does not predict investment results. Rather, it can be read as an analysis that investors should examine not only the index’s rate of increase, but also how narrow the group of stocks driving the rise is and how much leveraged and borrowing-based trading has accumulated in the market.
References
Tags #Investing #StockInvestment #LeveragedETF #ETF #BankOfKorea #DomesticStockMarket #KOSPI #StockPriceVolatility #SemiconductorStocks #SamsungElectronics #SKhynix #DebtInvesting #BorrowingBasedInvestment